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February 24, 2012

Greece Launches Bond Swap

Law requiring bondholders to accept losses is passed

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Greece on Friday took the next step in a second bailout package after Parliament passed a law Thursday that requires all its bondholders to accept losses once a certain percentage of creditors agreed.

The swap was triggered Friday, which according to a Reuters, started after 50% of the country's creditors responded. The new law puts in place collective action clauses (CACs), which will force all bondholders to proceed with the swap, Creditors agreed to accept an exchange of lower-value bonds for the ones they already hold.

The measure is designed to avoid a move by some hedge funds to trigger credit default swaps for complete repayment rather than accept the lower-value bonds. It was feared that such a move by hedge funds would trigger a default leading to an exit from the eurozone by Greece.

Bloomberg reported Wednesday that Fitch Ratings downgraded Greece to its lowest junk status over the measure, saying a default is “highly likely in the near term,” and that it will cut the nation again to “Restricted Default” once a bond exchange is completed.

There is little confidence among some eurozone members that austerity measures that were among the conditions for the bailout will be carried out, despite their passage by the Greek parliament. Dutch Finance Minister Jan Kees de Jager was quoted commenting, "The package is no guarantee that the problems in Greece will be solved. Greece will have to take extensive measures and show that it implements the necessary reforms."

Additional strikes and demonstrations are planned against the deeply unpopular austerity measures for next Wednesday, and parties that voted for them are falling rapidly in Greek polls. With elections due in April there is concern that the measures may be overturned.